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Blank-Check Backers Get a Bit Bigger

Buyout Shops,
Hedge Funds Join
The IPO Shell Game

Blank-check company IPOs are often touted as a way for smaller investors to participate in a private-equity deal without putting up millions of dollars.

Now, private-equity firms and other institutional investors are forming these structures and taking them public.

Although giants such as Kohlberg Kravis Roberts & Co. aren't venturing into this world, smaller private-equity funds, hedge funds and merchant bankers are lining up as backers of blank-check firms, also known as special-purpose acquisition companies, or SPACs.

With investments of a few million dollars of seed money in these empty-shell companies, which raise additional capital through an initial public offering, the founding firms can own as much as 20% of any operating business that a SPAC eventually buys.

When SPACs began to increase in number in 2005, the executives helming these acquisition vehicles were the ones investing their own money into each company's formation.

An Incentive

The seed money provided an incentive for the executives to acquire an attractive operating business, since management risked losing their investment if none were completed; conversely, they stood to gain a sizable portion of the resulting business if they were successful.

But the primary creators of SPACs have shifted in the past year toward larger entities such as private equity and hedge funds, said bankers.

Although there are no statistics available on initial SPAC ownership types over the past three years, of the dozen that have come public in 2008, nine received initial funding infusions from merchant banks, hedge funds or private-equity funds.

"In the last six to 12 months, SPACs have really grown into more organizationally driven structures," said
Robert Berger,
a director at Lazard Ltd., who advises on SPACs.

'Bigger SPACs'

Such deals in the past 12 months include a SPAC formed by private-equity firm MBF Healthcare Partners LP, which put up $7 million of its own money in 2007 to form
MBF Healthcare Acquisition Corp.
The company signed an agreement last month to purchase Critical Homecare Solutions Holdings Inc.

Hedge fund Hayground Cove Asset Management LLC launched Global Consumer Acquisition Corp.'s IPO in November with about $8 million of its own funds; the company has until late 2009 to make an acquisition.

Last month, merchant-banking specialist Tri-Artisan Capital Partners LLC, which in the past has co-invested alongside private-equity giant Apollo Management LP in a variety of deals, including the $30 billion purchase of casino chain Harrah's Entertainment Inc., filed to create its own SPAC, Tri-Artisan Acquisition Corp., pledging $6 million of its own money in the formation.

From the perspective of a merchant banker or hedge fund, a SPAC offers a quick way to raise money in today's market. The potential financial payoff also is a great attraction for institutions.

Beats 2 and 20

A firm that closes a deal for a $200 million SPAC can reap $40 million of stock in the acquired business; that tops a private-equity fund's 2% management fee and the potential for 20% of the profits from a portfolio company sale, said Mr. Berger.

The past six months haven't been kind to many institutional investors and, in particular, private-equity firms. In the wake of the subprime-mortgage crisis this past summer, which affected many lenders, financing terms have tightened, making leveraged acquisitions more difficult to complete. SPACs are now looking more attractive as a fund-raising option than in previous years, said bankers.

"Some private-equity firms initially may have thought that SPACs were directly competitive to what they do. However, as these private-equity firms start to appreciate the different acquisition approach a publicly traded SPAC takes, many are recognizing that SPACs may be more complementary to their core business," said
Thomas Reilly,
an investment banker involved in structuring SPACs at Merrill Lynch & Co.